Archives for 2018

Dave Ramsey’s 7 Baby Steps: Baby Step 5 – College Funding For Children

In baby steps 1-4 we worked towards paying off debt, building up an emergency fund and investing 15-20% of our income. In baby step 5 we look at saving for your children's education.

Baby Step 5: College Funding For Children

Baby step 5 talks about how if you've taken care of your other priorities first (like saving for your own retirement), you can save up and help pay for your child's education.

One thing that Dave Ramsey stresses, however is that you don’t have to go into debt for your child to go to college. Once you've taken care of your baby steps 1-4, start saving up a nest egg to help them pay for their education. Beyond saving for their education, also encourage them to take an active part in their own education, get good grades, and help pay for their education through grants, scholarships and other free money. If they're involved in paying for their own education, they'll be more invested in it.

Here are some ways that you can save for your kid's college education.

Education Savings Account (ESA): You may save $2,000 (after tax) per year, per child that grows tax free! Beneficiary must be under 18 years old. Money must be used for education purposes only. Otherwise, a 10% penalty and taxes will apply. Money must be used or rolled over to a qualifying family member by age 30 or a 10% penalty and taxes will apply. Singles with an income over $110,000 – or married couples with an income over $220,000 are not eligible.
529 Plan: If you do not meet the income limits for an ESA, or if you want to save money above an ESA, you can use a certain kind of 529 plan. You can save up to $12,000 per year, per child in a 529 plan. The money must be used for higher education only. Otherwise, a 10% penalty and taxes will apply to the gains only.
UTMA/UGMA Plans: UTMA (or UGMA) stands for Uniform Transfer (Gift) to Minors Act. Not usually as good as the ESA or 529 plans.

Here are some ways that Dave Ramsey thinks should never be used to fund your child’s education. Beware of these things:

Insurance
Savings bonds (only 5-6% growth)
Zero-coupon bonds. (only 6-8% growth)
Pre-paid college tuition (only 7% inflation rate)
401k loan (never!)
Home equity loan

ESAs, 529 Plans and UTMA/UGMA plans are preferred by Ramsey.

Should Other Things Come Before Your Kid's College Funding?

Providing for your child's education is an emotional topic, and for many people providing for their kid's and their schooling is so important it comes before they have reached baby step 5 in the process. They think that by not funding their child’s education until they have all their debt paid off or retirement funded that somehow they are being self absorbed or that they're harming their child.

In my opinion you do more harm if you don't do baby steps 1-4 first. Your kids can always help pay for their own education through grants, scholarships and loans. On the other hand, if you don't get money saved for retirement, and get all your other financial ducks in a row, your child could end up having to support you or pay for your care in the future. You don't want to saddle them with that responsibility do you? Better to get your financial house in order first, and then help where you can. If you can get out of debt, save for retirement and then help pay for their schooling as well – even better!

Here's why I believe it's a good idea to get out of debt and save for retirement first.

Making sure your retirement is provided for takes a burden off of your children later on.
Set a good example for your children by showing them how to properly manage your finances.
Having to pay for part of your education helps build character and makes the education mean more.
Encouraging them to do well ins school to help pay for their own university training will help promote responsibility.

Personally I think that even if you are able to pay for your child’s schooling outright, it’s a good idea to have them participate in paying for their own schooling. They can do that either by saving up for college through after school jobs, getting good grades that lead to grants and scholarships, and by going to in-state schools that cost less. Here's a post on another site talking about these ideas.

Dave Barry says it better than I can:

I believe that we parents must encourage our children to become educated so they can get into a good college that we cannot afford. – Dave Barry

In baby step 5 Dave Ramsey encourages us to take control of our financial lives, and take care of our own debts and retirement savings before helping our children to pay for college. Once we've completed steps 1-4, however, he suggests it's a good idea to help them pay for college by saving money in an ESA, 529 savings plan or a UTMA/UGMA Plan.

What’s your opinion of paying for your kid’s college? Are you saving for their college funds? Will they have to pay for part of it themselves? Let us know in the comments.

Dave Ramsey’s 7 Baby Steps: Step 4 – Invest 15% (Or More!) Of Your Income

By Mr. Money Leave a Comment

Last time in the baby steps series we looked at baby step 3, saving up 3-6 months of expenses. You never know when you're going to have an unplanned expense like a major medical event or a job loss. It's best to plan ahead and be ready when those things happen, because, they will happen!

Today in baby step 4 we want to look at the things you should do once your debt is gone and you've saved up a 3-6 month emergency fund (or more like we have). It's time to invest!

Baby Step 4: Invest 15% Of Gross Income Into Roth IRAs And Pre-Tax Retirement

Baby step 4 is for me the point in the process where you realize that you've reached the top of the hill, and from now on you'll be coasting downhill saving up for retirement. It's an exciting step in my opinion. You’ve finally paid off your debts (except the house) and built up your big emergency fund, and now it’s time to save in a variety of places to fund your retirement!

Ramsey suggest saving 15% of your household income in good solid long term investments. Personally I think 15% is a good starting number – although I would love to save even more!

Why Is 15% A Good Number To Invest?

To give a graphical display of why saving 15% for your retirement is suggested by Dave Ramsey, I went and inputted some numbers into his investment calculator. I put in these numbers:

Making $100,000 a year
Saving 15%
$1250/month invested (15% of 100k)
Starting at age 30
Saving for 30 years
8% return on the investments (Ramsey suggests a 10% return, I'm a bit more conservative)

When you put in those numbers above, it comes up with a return of well over 1.875 million dollars by the age of 60.

If you were to keep it going even for 5 more years until the age of 65, the account would grow to over 2.794 million dollars. That’s not half bad!

Ramsey actually suggests that you'll see returns in excess of 10% on your investments. While I don't think it's impossible, I do think that a more realistic number is around 8%. Be conservative in your planning and if your returns are more – great!

What Should I Invest In?

Now that we've decided on 15% or so to invest, we need to look at what investment vehicles we want to use. Ramsey suggests:

If you receive a company match in your 401(k), 403(b), or TSP; invest in those plans, up to the match, first. Once your contribution equals the company match, fully fund a Roth IRA for you and your spouse. If you’ve maxed out your contribution to your Roth IRA and still have money to invest, invest the rest in your 401(k), 403(b), or TSP.

So he suggests that you invest in:

Company 401k or other plan up to the match. (free 100% return!)
Roth IRA for you and spouse if you have one.
Max out the 401k or other plan

In your company 401k, Roth IRA or Traditional IRA, Dave suggests allocating your investments with a good mix of mutual funds. His preferred plan is to allocate 25% to each of the following types of stocks in your funds:

Growth
Growth & Income
Aggressive Growth
International

Personally I've been a bit wary of Dave's investing advice as a lot of very smart people have suggested that his strategy of using front end loaded mutual funds means you'll be paying a ton in fees – and your returns won't be more than just investing in a good index fund, or other low cost investments. That may be an argument for another day – but I think we can all agree – that investing 15% or more is a great idea for everyone – the earlier you get started, the better.

What do you think about baby step 4 – is 15% be enough for you to save for your retirement? Do you think you should save more or less? Do you have another strategy? Tell us about it in the comments.

M1 Finance Review: The Fee Free Self-Directed Brokerage

By Mr. Money 1 Comment

As a long-term investor, I do everything I can to ensure that my returns are as high as possible over the long haul.

What sort of things am I doing to ensure that I come out ahead?

I'm doing my best to keep my investments diversified, and keeping the costs for my investing low. Typically people can see fees, commissions, expense ratios, and account costs eat into their end returns, and it doesn't have to be that way. There are now free alternatives!

I recently discovered a new hybrid brokerage and robo-advisor called M1 Finance. They give you the flexibility to invest in their preset portfolios using diversified ETF index funds, or you can invest in individual stocks, like with a traditional brokerage. Best of all, they're fee-free!

In this review, we'll take a deep dive on M1 Finance and what they have to offer, so let's get started.

M1 Finance Founding

M1 Finance launched in September of 2016. 25-year-old Stanford graduate, Brian Barnes, founded the company. From Business Insider:

When Brian Barnes graduated from Stanford in 2012, he had a hard time finding a tool with which he could invest in the stock market on his own. This prompted him to start his own online brokerage site, M1 Finance, at 25 years old.“What I was trying to do seemed relatively basic,” Barnes penned in a recent post on M1's site. “I wanted to be able to pick my investments, and have recurring deposits automatically added to those allocations.”And that's exactly what M1, which has $60 million under management, allows users to do. M1 users can pick the stocks they want to invest in and then they can determine what percentage of their portfolio they want each position to make up. M1 automatically updates as you put in more money and as stock prices fluctuate to maintain your preferred portfolio allocation. So if you want Apple to make up 25% of your portfolio, M1 will balance your portfolio as such. That means you can't buy one Apple share, or one Amazon share. It's all about the portfolio.

M1 Finance gives you the automated investing tools of a robo-advisor, with fine control over your individual investments like a traditional brokerage.

The cost of using M1 Finance is pretty darn cheap. It's FREE to use the basic service! So let's get into the details.

M1 Finance – Opening An Account

To open an account with M1 Finance first you have to choose what type of account you want to open:

Taxable Investment Accounts
Roth IRA
SEP IRA
Traditional IRA
Trust Accounts
Rollover IRA

There is a 3-step process. First, you'll enter basic details like name, email, and password, and then you proceed to:

Build Your Portfolio: M1 Finance's “Pie” portfolio concept will be introduced, and you'll walk through the process of creating your portfolio.
Start Your Brokerage Account: Choose your account type and complete your profile details for your account.
Deposit Money Into Your Account: Link your account that you'll use to fund your M1 Finance account.

There is no minimum amount to open an account, but to invest you'll need at least $100 in your account. Personally, I decided to drop $1000 in there right away to get started. Your free account can be opened through the link below.

Open Your FREE M1 Finance Account Now

The Details Of How M1 Finance Works

M1 Finance is one of the most flexible robo-advisors available at this time. Many robo-advisors will give you the option of only a few pre-built investment portfolios, ones they've built for a general audience. Usually, the only changes you can make are to the ratio of stocks to bonds included in the account.

M1 Finance gives you granular control over your investments if you want it.

Pie Investing

M1 Finance has an investing concept that they use where they call individual investment portfolios “pies”.

Pies are the basic organizational structure for your investments. The pie can have as many as 100 slices to it. Each slice can be an individual stock, an ETF, or even another set of investments via another pie.

Each slice that you've added to your pie is assigned a percentage of the total pie, and when dividends are paid out, or funds are added to your account, the system will do its best to ensure that the percentages stay consistent.

If you're not adventurous and want M1 Finance to do the work for you, they have over 60 pre-built pies that you can choose from. Want to choose one of their pies and then add a couple of individual stocks to it? You can do that too!

Pie Types

The pies that M1 has created are broken down into 8 types or categories

General Investing: Build a diversified portfolio that's based on your personal level of risk tolerance.
Plan for Retirement: Invest in a portfolio tailored for you and your target retirement date.
Responsible Investing: Invest in socially and environmentally friendly investments.
Income Earners: Choose investments based on dividends and income returns.
Hedge Fund Followers: Aims to emulate the strategies of successful investors and hedge funds with good reputations.
Industries and Sectors: Invest in specific sectors like aerospace, biotech, and more.
Just Stocks and Bonds: Gives you a highly diversified portfolio with a total world stock fund, and a bond fund.
Other Strategies: Other popular investment strategies that you can use to meet your goals.

Create Your Pies And Start Investing

Once you have chosen a stock pie from M1, or have customized your own, the pies will now live in your dashboard. You can add as many (or as few) pies to your account as you want, with the one caveat that a “portfolio generally cannot hold over 500 individual positions“.

Once your pies are built and saved in your dashboard, there are a few things to remember.

All trades are made by M1 Finance at 9 AM central on days that the New York Stock Exchange is open for business.
Once the amount of cash in the account reaches $10, it will be auto-invested.
For every new contribution or dividend deposit, M1 will invest those funds into under-weighted slices of your pies to bring them into balance. New contributions and dividend reinvestment will aid in automatic re-balancing.
You can do a manual account re-balance as well through your dashboard, either on a specific pie, or on your whole portfolio.

M1 Finance Apps On Mobile

M1 Finance has well-reviewed mobile apps available for both iOS and Android. I've tried it and it looks great!

The apps allow you to do most things you can do on the website including creating your portfolios, setting up automated investments, re-balancing your portfolio pies, and more.

M1 Borrow

Earlier this year M1 Finance announced a new feature of their accounts that would allow you to borrow money from M1 Finance at a rate that is extremely low, 4%.

How does it work? Let's say you want to build a deck on your house. You can instantly borrow up to 35% of your account balance at a low rate of 4% to make that happen.

There is a caveat. Your brokerage account has to have a $10,000 balance or greater.

How does 4% rate compare when looking at other traditional loan types? It compares pretty favorably.

The nice thing about borrowing from your account is that there is no paperwork, credit checks or application denials to worry about. Just have an account with $10k balance and you'll be able to borrow up to 35% of the balance at a rate lower than you can find in most other places.

M1 Finance Comissions & Fees

One of the biggest pros that M1 Finance has at this time is the fact that they are a fee-free service, and there is no minimum to open an account.

If you want to invest your funds there is a $100 minimum with a taxable account, and a $500 minimum for retirement (IRA / Roth IRA) accounts. That's still a pretty low bar for most folks.

M1 Finance used to have an annual management fee for assets under management, but they made a positive change and dropped that fee. The following things are all now fee-free:

Management fee: FREE
Trading fees: FREE
Re-balancing fees: FREE
Dividend reinvestment fee: FREE

If you're looking for where some fees might reside, M1 Finance does have fees related to transferring funds via wire transfer, or to do a full account transfer out. That's pretty standard though, and regular electronic funds transfers (EFT) are free. To see a full listing of their administrative fees see their fees disclosure page.

M1 Finance – Flexible, Low Cost, Easy To Use

M1 Finance is a cool new investing platform, and it's one of the best I've come upon in the last few years.

They're similar in some ways to other robo-advisor platforms in that you can deposit your money, and choose a preset investment portfolio, and set it to auto-invest, but they're much more flexible than most.

Not only do they have pre-built portfolios, but you can create your own investment pies that include any combination of stocks, bonds, or other pies. Just find what you want to invest in and add it to your pie – there are no trading fees!

M1 Finance is one of the more innovative, low-cost investing companies available for regular investors. I recommend giving it a try.

Open your free account through the link below.

Get Your M1 Finance Account Now!

Switching Banks Can Pay Off

By Contributor Leave a Comment

Having a bank account is absolutely necessary these days.

People rely on banks for many services. They use them to make sure all of their bills are paid, as well as having easy access to any money they've worked hard to earn.

Many people develop a relationship with their bank. They rely on the bank not only as a place to store funds, but also as a place where they can seek out financial advice.

A bank can help with other aspects of their lives, including financing a home and planning for retirement. A good bank can help them make important life decisions such as what kind of investing is right for their risk tolerance level and how to afford the house in the neighborhood they like best.

While a great relationship with a bank is ideal, sometimes this relationship isn't quite working out. In that case, it may be time to think about switching to another bank.

What To Look For in a New Bank

The process of looking for a new bank may feel quite confusing. Many people have an idea of the kind of bank they want to find but aren't always sure what will work.

It's a good idea to take the time to look carefully. Banks like https://www.oakstarbank.com/ can help.

It's a good idea to think about the person's overall finances. People are at different stages financially in life. A young person just starting out may have concerns such as paying off student loans. An older couple may be looking ways to help them increase their savings and pay for retirement as well as ways to help to pay for any ongoing medical bills.

Each person should think about the kind of financial issues that impact them personally. This includes mortgage interest rates, money market interest rates, their personal debt load, and their ability to access their funds as soon as they need them.

It also includes things such as the location of the branches near their home or place of business and the amount of money they need to keep in the bank account in order to avoid having to pay fees.

Each person should site down and think about what they're looking for in a new bank before they start.

Different Banking Services

A bank offers many different kinds of services.

Banks offer mortgage loans, personal loans, and loans to start a business.

A bank also offers help with opening money market funds and other kinds of savings vehicles.

Banks provide people with the means to learn about the market and discover how it can work for them.

Many customers are looking for banks that offer friendly services from highly-trained staffers. They are seeking out advice about this crucial area of their lives. Staffers can show people how to open up an account. They can also help them order checks, make sure any savings are transferred between accounts, and demonstrate the right mortgage for their personal financial background. A bank can also show people how to open up an account they can access online and how to make sure their paycheck is directly deposited and all bills are paid electronically from the account and on time.

All of these services help the client create a firm financial base from which to use their funds most efficiently as well as make important plans for their personal financial future.

Superior Customer Assistance

Switching banks is a highly personal decision. Doing so, however, can bring rewards.

Banks love to bring in new customers, and many offer incentives of all kinds to bring people in. Things such as lowered or no fee checking, or even useful gift cards.

Bringing one's business to a new bank offers the opportunity to establish new connections that are useful for the client and allow them to find a bank that works better for their current needs.

A person's life circumstances can change rapidly over time. They may have a new baby or a new job in a new city.

They might have moved to another neighborhood.

It's a good idea to periodically consider the person's banking choices in the process. Help from a bank with staffers who are dedicated to providing superior customer service to all customers allows the client to determine the very best course of action for their deeply personal fiscal life situation.

Dave Ramsey’s 7 Baby Steps: Step 3 – 3 To 6 Months Of Expenses In Savings

By Mr. Money Leave a Comment

Last time we looked at Baby Step 2, paying off all your debt using the debt snowball. You take your bills, put them in order from smallest amount to largest amount, and proceed to pay them off one by one, snowballing the amounts until the debts are gone!

Baby Step 3 – 3 To 6 Months Of Expenses In Savings

In baby step 1 we built up a $1000 emergency fund in order to protect us from life's little emergencies. In baby step 3 we are going to take our emergency fund to the next level, and continue building it until you have at least 3-6 months of expenses saved up. Dave Ramsey calls it the “fully funded emergency fund of 3-6 months of living expenses“.

Why do you need to build up your balance in your emergency account? This larger balance will allow you to build up an umbrella to keep you protected from the storms of life. Because life events WILL happen. When you have a fully funded emergency fund, you're less likely to ever have to go into debt again.

When you have a fully funded emergency fund of 3-6 months, there aren't many things that can happen that would cause you to be in immediate danger. Lose a job? You'll be able to cut back and cover your mortgage long enough to find another job. Have your appendix rupture? You'll be able to cover your large health insurance deductible.

Having that large emergency fund will help mitigate the risk of unplanned negative events – of which we will all have encounters with many times in our lifetimes.

Why Are Emergency Funds So Important?

I've heard a lot of people say that they think this emergency fund of 3-6 moths is too large (we thought it was too small and have saved closed to 8-10 months of expenses), and they can't imagine ever having to use that much money to fix a problem. Why not instead invest the money or use it for a vacation?

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Here are just a few of the reasons why we've saved up our emergency fund.

Negative events DO Happen: As the quote on this page says, 78% of us will have a major negative event happen in any given 10 year period. Those are pretty good odds.
Less Stress: When you have an emergency fund to fall back on, there is a lot less stress worrying about how you're going to pay the bills.
Risk Is Managed: An emergency fund (along with other things like health insurance, disability insurance and life insurance) will give you a situation where you have substantially less risk of having a bad situation turn into a horrible one. A hospitalization won’t turn into bankruptcy, and a job loss won’t turn into a foreclosure. Plan for problems, before they happen. Don't allow problems you could have planned for turn into life changing events.

How Much Is Enough?

When talking about a fully funded emergency fund, you'll need to talk with your family about how much you want to save. Ramsey suggests that you save 3-6 months of expenses, but that can obviously change based upon your situation. Factors to take into account include number of children, job stability and other factors. For example, if you're expecting to be laid off, you'll probably want to save up as much cash as fast as you can. In a stable job with no kids? A smaller amount might work. The very baseline amount that Dave Ramsey speaks of is 3-6 months of expenses.

How much should you save? An example: If your family has a minimum of $2500 in expenses every month after cutting out all the un-necessary bills, your 3-6 months of expenses would come out to anywhere from $7500-$15,000.

At our house we like the peace of mind that comes with the emergency fund, plus we have a child – so we have saved up 10 months in our emergency fund currently. Figure out the correct amount for your family and situation.

Can I Invest My 3-6 Months Of Savings?

One question that often comes up is this – “Should I invest my emergency fund in a CD, or a mutual fund?”. Usually the answer to that would be no – you want to keep the emergency fund pretty liquid, and accessible. That's the reason for the emergency fund – for unplanned and unexpected emergencies!

Personally I prefer to save the bulk of my money is a good high-yield savings account, like the ones offered by Ally Bank. I then keep $1000 in my local bricks and mortar bank as well just in case I need it in a hurry.

Don’t put your emergency fund in things where you can't get at it fast – like real estate, mutual funds or by investing in a cousin's business. Keep your emergency fund liquid!

Do you think saving up 3-6 months of expenses is enough? How much do you have saved in your large emergency fund? Do you prefer to use credit cards as your emergency fund? Tell us your thoughts in the comments.

Dave Ramsey’s 7 Baby Steps: Step 2 – Pay Off All Debt Using The Debt Snowball

By Mr. Money 5 Comments

In my last post in the 7 Baby Steps series, we looked at Baby Step 1, saving up an emergency fund of $1000.

You save up that baby emergency fund in order to insure yourself against the risk of life's little emergencies that have a way of popping up at the least opportune time. If you don't save up that money as an insurance policy, you can be assured that your plan to get out of debt will be set back many times over by many little “emergencies”.

If you have an emergency fund saved, no new debt is created, and you just take the time to re-stock that emergency fund in case of further expenses.

Today we will look at Baby Step 2, paying off all debt using the debt snowball.

Pay Off Your Debt Using The Debt Snowball

Now that you’ve got your $1000 emergency fund saved, it's time to get intense about paying off all your debt. Dave Ramsey likes to call this getting “gazelle intense”, in reference to the bursts of speed and intensity a gazelle will use in order to get away from a cheetah (or in our case, debt).

For many people this step is the longest in your 7 baby steps.

If you’ve built up a lot of debt over the years in the form of student loans, auto loans, credit card debt and other things, it probably took you a long time to get so far in the hole, and it will take quite a while to dig your way back out. But you CAN get back out!

If you're not so far in the hole, getting out of debt can happen a lot quicker, and you can get on to the next steps of building up a larger emergency fund, paying off your home early, building wealth and giving more.

If you've gotten this far and you haven't done a budget yet, now would be the time to get started.

Figure out where you are in regards to your income, expenses and your debt obligations. Do a zero based budget and make sure that every dollar is accounted for – because every extra dollar is now going to be going to debt reduction.

Once you’ve got all of your income, expenses and debt listed, follow these steps to get rid of your non-mortgage debt. (Mortgage debt is paid off separately in another baby step, so exclude it for now)

The Debt Snowball

Here is a rundown of the debt snowball plan.

Put all your debts in order from the smallest balance to the largest balance.
After you have paid for food, clothing, transportation and a roof over your head (the necessities), pay the minimum payments on all of your debts.
Put any extra money left over towards paying off the smallest debt first.
Pay off your smallest debt, and then “snowball” the money you were paying on that debt over to the next largest debt.
Continue paying off the next largest debt, and when that one is complete, roll it all over to the next largest debt until you are completed.

That's not too hard, right? Just pay off your debts from smallest to largest until they are all paid off!

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